The Litmus First XI – Top Tips for Managing the Relationship with your Rating Agency

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The Numbers

1. Make sure the agency capital model is completed properly

Obvious, but we’ve seen a number of examples where there were errors that weakened the result and/or key strengths that could have been highlighted but were missed.

2. Prospective earnings are crucial, but you have to make a compelling case for them

Both AM Best and S&P have always seen prospective earnings as fundamental to the rating and S&P’s recent criteria change* makes this even more explicit. It’s partly about your track-record but also the ‘why’ of how your market position, competitive advantages and underwriting controls will deliver the results you are forecasting.

3. They are NOT asking you to diversify!

It might seem like this and they might even appear to suggest it (although they shouldn’t as that would be ‘advice’) but this is just a confusion of the analytical point. Namely, concentration risk is a fact of life for specialists and you get penalised for it if that is your profile. That is not ‘solved’ by ‘diversification for diversification’s sake’, unless it’s into areas you can demonstrate you really understand well and that you will not be ‘buying business’ (both of which they will be concerned about).

4. Reserve adequacy is always a concern

It’s the hardest thing for a third-party analyst to be confident about. If you think you over-reserve provide as much supporting evidence (succinctly!) that you can. If you have under-reserved in the past they are bound to be worried, so address it.

The analysts you meet are your communication channel to the members of the committee. Not only do you need them to believe in the strength of your profile they need to be able to effectively explain this to a committee whose job is – in part – to be sceptical.

6. Why don’t they believe us?

Claiming future success (even given a strong track-record) is not enough. It might seem galling that they won’t just accept what you say at face value but that’s their job. Give analytical reasons for believing in your strengths (market share, distribution channel strengths, underwriting controls, specialist knowledge, strength of client relations etc.) and data/research that support them.

7. Don’t look to rely on ‘comments’ you make at the management meeting

If it’s important, put it in the presentation. Even if they accurately note all your verbal comments and responses to questions, they may not remember the exact rationale. That will not work with the committee.

8. Understand the point of each part of the criteria and address all their questions

Each part of the rating criteria has a point to it in terms of deciding the rating. The better everybody involved understands what that is the more likely you are to successfully explain your strengths in that context and/or address any perceived weaknesses.

9. Make sure the message is clear and memorable

If you believe you have a good story to tell on any part of the analysis put the message in the slide heading (don’t leave it as the final point at the bottom of the slide!). If something is subjective use memorable anecdotes to illustrate the point.

10. Graphs and diagrams are good but don’t be too clever, or cute, with them

Use graphs to clearly show the important trend, fact or process. But don’t make them too complex or the power of the point will get lost. And don’t be ‘cute’ with the years you select or the ‘axes’ of a graph. They will probably spot it (or, worse, they will miss it but somebody at the committee will notice).

11. ERM is a strategic process

Make sure you cover your ERM function specifically but also make sure it’s clear how it informs strategy, derives from the board and is embedded across your operations.

*Litmus’ next training course on S&P’s new rating criteria is in London on September 18th. A few places remain.

This Litmus summary guide was first published in the Intelligent Insurer daily newsletter at the Monte Carlo Rendezvous on Sunday 10th September 2013